USA v. Capital Tax Corp, et al
Filing
524
MEMORANDUM Opinion and Order. Signed by the Honorable Young B. Kim on 5/31/2012. (aac, )
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
UNITED STATES OF AMERICA,
Plaintiff,
v.
CAPITAL TAX CORP., et al.,
Defendants.
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04 CV 4138
Magistrate Judge Young B. Kim
May 31, 2012
MEMORANDUM OPINION and ORDER
Before the court is the government’s petition for rule to show cause why SunWest
Mortgage Company, Inc. (“SunWest”) and Defendant William Lerch should not be held in
contempt for violating the citations to discover assets and this court’s July 19, 2011
garnishment order. For the following reasons, the petition is denied:
Background
On January 13, 2011, the government served a citation to discover assets on SunWest.
(R. 377.) SunWest responded by providing documents showing that it was paying Lerch
$1,379.77 per month under a reverse mortgage loan agreement. (R. 433, June 29, 2012 Mem.
Opinion and Ord. at 2-3.) On June 29, 2011, this court granted the government’s motion for
a garnishment order with respect to the $1,379.77 monthly payments. (Id. at 10.) The
garnishment order states that SunWest must submit to the government the stream of
$1,379.77 monthly payments it owed to Lerch. (R. 440.) The court further ordered SunWest
to continue to submit the stream of these payments until the debt to the government was fully
paid or “until SunWest no longer ha[d] custody, possession or control of property belonging
to Lerch,” or until subsequent order of the court. (Id.) In response, SunWest forwarded the
February and March 2011 payments, totaling $2, 759.54, to the government. (R. 490, Govt.’s
Pet. at 1.)
When the government inquired of SunWest regarding the deficiency in the amount
turned over, SunWest explained that three months prior to the court’s issuance of the
garnishment order, Lerch had instructed SunWest to terminate the monthly payments to him.
(R. 490, Ex. B.) Under the relevant provisions of the reverse mortgage agreement, Lerch had
three ways of borrowing money from SunWest: (1) monthly payments; (2) a line of credit
without monthly payments; or (3) a line of credit with monthly payments. (R. 513-1, Loan
Agreement at 2-3.) On March 11, 2011, without informing this court or the government,
Lerch requested that SunWest stop his monthly payments and issue a line of credit instead.
SunWest honored the request and converted the amount available for loan advances
($183,525.18) to a line of credit (“the conversion”). (R. 490, Ex. B.) SunWest, however,
froze this line of credit because of this pending matter between the government and Lerch.
(Id.)
The government petitions the court pursuant to Federal Rule of Civil Procedure 69
and Illinois Supreme Court Rule 277(h) for a rule to show cause. Pursuant to Rule 69,1 this
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Rule 69(a)(1) states that:
A money judgment is enforced by a writ of execution, unless the court directs
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court must follow Illinois procedural rules to address the issues the government raises in its
petition. According to Illinois Supreme Court Rule 277(h), “[a]ny person who fails to obey
a citation, subpoena, or order or other direction of the court issued pursuant to any provision
of this rule may be punished for contempt.” The government claims in its petition that Lerch
violated the citation to discover assets served on him when he requested the conversion and
that SunWest violated the citation and the July 19, 2011 garnishment order when it honored
Lerch’s request and failed to turnover additional sums to the government. (R. 490 at 2.) The
government, however, did not develop or identify any legal support for its arguments in its
petition.
On March 7, 2012, the court held a motion hearing. The court expressed its opinion
that the issue of whether Lerch and SunWest violated any citations or garnishment orders
depended primarily on the ownership of the remaining balance of the reverse mortgage
($183,525.18). The government took the position that the court need not ask the question of
who has the ownership interest in this balance because it argued that when Lerch directed
SunWest to terminate the monthly stream of income, he altered the status quo, and thus
violated the citation. The proper remedy for this violation, according to the government, is
to order SunWest to restore the stream of income and then to submit those payments to the
otherwise. The procedure on execution—and in proceedings supplementary to
and in aid of judgment or execution—must accord with the procedure of the
state where the court is located, but a federal statute governs to the extent it
applies.
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government until the balance is depleted. Lerch argued at the hearing that unless and until
a monthly loan advance is paid out by SunWest, the funds available to him under the reverse
mortgage contract are not his property, and therefore he does not own the balance available
as a line of credit. He argued that to hold otherwise would amount to the court forcing Lerch
to borrow money using his exempt real property as collateral.
At the motion hearing, the government requested time to file a more comprehensive
memorandum of law in support of its petition. Lerch and SunWest likewise asked for time
to oppose the petition in writing. The court granted the requests. Despite securing leave of
court, the government chose not to file any memorandum of law in support of the assertions
raised in its petition or the arguments it made at the motion hearing. Both Lerch and
SunWest filed a response opposing the government’s original petition. The government
timely filed a reply on May 7, 2012.
A brief discussion of the government’s reply brief is necessary before addressing the
merits of its petition. In general, arguments raised and/or developed for the first time in reply
briefs are considered waived and forfeited. Broaddus v. Shields, 665 F.3d 846, 854 (7th Cir.
2011); Harper v. Vigilant Ins. Co., 433 F.3d 521, 528 (7th Cir. 2005) (holding that failure
to develop an argument until the filing of a reply brief constitutes waiver). In this case,
despite having been given the chance to submit a brief supporting the arguments it made
during the motion hearing, the government waited until its reply brief to develop its argument
that both Lerch and SunWest were barred from implementing the conversion. (R. 514,
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Govt.’s Reply at 3-6.) Also, the government waited until its reply brief to argue that because
Lerch failed to advise the court of the conversion prior to the court’s issuance of the
garnishment order, he should be barred under the doctrine of res judicata from raising the
conversion as a way to avoid the garnishment order. (R. 514, Govt.’s Reply at 7-8.) Given
that the government was aware of the relevant events when it filed its petition, this argument
should have been raised in its opening brief. Reply briefs are for replying to the arguments
and facts raised by the opposing parties and not for raising facts or arguments that could have
been asserted in the opening brief. The government had two chances to raise and to develop
its arguments—when it first filed its petition and when the court allowed it to supplement its
petition with a supporting memorandum of law—but it failed to avail itself of those chances.
As stated in its order of May 10, 2011, the court will not consider arguments raised for the
first time in its reply brief. (R. 517.)
Analysis
When a party files a petition or a motion for a rule to show cause, “the moving party
is asking only for a preliminary order directing the alleged contemnor to show cause why the
court should not find him in contempt.” U.S. S.E.C. v. Hyatt, 621 F.3d 687, 696 (7th Cir.
2010) (emphasis in original). “The purpose of a [show-cause] motion is to persuade the court
that there should be a hearing at which the factfinder will ultimately evaluate whether a
finding of contempt is appropriate on the evidence presented.” Sommerfield v. City of
Chicago, 252 F.R.D. 407, 413 (N.D. Ill. 2008). The issue in this petition is not whether the
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court should hold Lerch and SunWest in contempt and impose sanctions, but whether the
court should put them on notice that they may face sanctions if they fail to show good cause
why they should not be held in contempt. The burden of establishing the appropriateness of
a hearing is less demanding than that for establishing contempt, requiring only “a preliminary
assessment that the facts presented implicate” that the alleged contemnors are in violation
of court orders. Id. at 413-14 (quotation omitted). Although the mere insistence on a hearing
“is never enough,” what is required is merely a threshold factual showing made up of
“sufficiently definite, specific, non-conjectural and detailed” allegations along with a
material fact dispute that will affect the motion’s outcome. Id. at 414.
In this case, the government failed to reach the required threshold. The government
refers to the citations to discover assets and the July 19, 2011 garnishment order in its
petition. The citations served upon Lerch and SunWest state in relevant part that:
YOU ARE PROHIBITED from making or allowing any transfer or other
disposition of, or interfering with, any property not exempt from execution or
garnishment belonging to you, the judgment debtor, and from paying over or
otherwise disposing of any money not so exempt, which is due or becomes due
to you, the judgment debtor, until further order of court or termination of the
proceedings. You are required to withhold the payment or transfer of any
money or other property no more than twice the amount of the unsatisfied
judgment.
(R. 377, Citation Served on SunWest; R. 455, Citation Served on Lerch (emphasis in
original).) And the garnishment order directs SunWest to “submit to the [government] the
stream of $1,379.77 monthly payments it owes [Lerch] which represents Lerch’s nonexempt
interest in those funds.” (R. 440.) The record shows that in March 2011—after the service
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of the citations but before the entry of the garnishment order—Lerch requested the
conversion. (R. 490, Ex. B.) SunWest honored the request by terminating the $1,379.77
monthly loan advances to Lerch and by creating a line of credit in the amount of
$183,525.18. (Id.) The government asserts that by stopping the loan advances, Lerch and
SunWest essentially disposed of and interfered with non-exempt property in violation of the
citations. The government further asserts that by failing to submit the loan advances to the
government, SunWest violated the garnishment order. (R. 490 at 2-3.)
In response, Lerch raises three arguments why his conversion request does not put him
in violation of the citation to discover assets. First, he argues that he did not interfere,
transfer, or otherwise dispose of non-exempt property that belongs to him or is due to him
because the funds that are available for him to borrow are not funds that belong to him.
(R. 513, Lerch’s Resp. at 3.) Second, Lerch submits that SunWest was not obligated to make
monthly loan advances unless he continued to borrow money. Third, Lerch argues that if the
funds available for borrowing are deemed funds that belong to him, these funds are exempt
under Florida’s homestead exemption. (R. 513, Lerch’s Resp. at 5.) Because the court is
persuaded by the first two arguments, it need not address the third.
The government points out in its petition that Lerch never disclosed to the government
or to the court that he had effectuated the conversion when the court was addressing the issue
of whether a garnishment order should be issued as to the monthly loan advances. (R. 490
at 2.) But this point is neither here nor there. The issues in the government’s May 13, 2012
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motion for a garnishment order against SunWest centered around the monthly loan advances
and not the total value of the funds available for borrowing under the loan agreement. The
government did not seek to have SunWest turnover the entire balance of the reverse
mortgage. As the court commented during the motion hearing, the court expected Lerch to
terminate the loan advances as a result of its ruling, which skewered his incentive to continue
to borrow money under the reverse mortgage. The court also noted in its order dated July 22,
2011, that the court’s ruling granting the garnishment order against SunWest did not force
Lerch to “continue to borrow” money from SunWest. (R. 448.)
While the government claims that Lerch was prohibited from exercising his
contractual right to stop borrowing money from SunWest, it fails to provide any legal support
for this proposition. Even the Supreme Court decision the government belatedly cited in its
reply brief, Drye v. United States, 528 U.S. 49 (1999), fails to support the government’s
position. In Drye, the petitioner became entitled to his deceased mother’s estate worth about
$233,000 in 1994. Id. at 52-53. At that time, the petitioner owed the federal government
$325,000 in back taxes, and the government had valid tax liens against the petitioner’s
“property and rights to property.” Id. at 53. To prevent the assets from going to the
government, six months after he had been appointed the administrator of the estate, the
petitioner disclaimed his interests in the estate. Id. By doing so, the estate passed to the
petitioner’s daughter who then created a family trust funded by the proceeds of the estate.
Id. The petitioner was then made one of the beneficiaries of this family trust. Id. at 53-54.
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Under the applicable state law, the assets of this trust were shielded from creditors seeking
to satisfy any debts of the beneficiaries. Id. at 54. The government placed a tax lien on the
assets of the trust anyway and sought to seize the assets to satisfy the petitioner’s back taxes.
Id. The trial court sided with the government that the assets were subject to seizure and the
United States Court of Appeals for the Eighth Circuit affirmed. Id.
In reviewing the Eighth Circuit’s decision to affirm, the Drye Court considered the
question of whether the petitioner’s right to disclaim his interest in his mother’s estate was
itself property or a right to property. Id. at 60-61. The Drye Court concluded that it was,
because the petitioner exercised control over the assets of the estate when he disclaimed his
interests. Id. The court noted that it was “beyond debate” that the petitioner “had, at his
mother’s death, a valuable, transferrable, legally protected right to the property at issue.” Id.
at 60. The Drye Court explained that the petitioner exercised control over the assets because
by exercising his right to disclaim his interests, he exercised his power to channel the value
of the assets to “a known other”—his daughter. Id. at 61.
Here, the circumstances are different. At no point did Lerch have control over the
funds in the account at SunWest. Under the preexisting reverse mortgage agreement, Lerch
had agreed to borrow $183,525.18 from SunWest over time in one of three ways. Originally,
he chose monthly payments. But when he switched gears in March 2011 and opted for a line
of credit, he did not “exercise control” over the pot of money the way the petitioner did in
Drye. Rather, he changed the method by which he would borrow money controlled by
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SunWest. He did not channel the funds to anyone particular or create a situation that would
permit him to withdraw or borrow money without triggering the garnishment order. The
balance remains with SunWest and SunWest is free to do what it wishes with the funds, as
long as its actions do not violate the demands of the citation or the orders of this court.
Under Drye, Lerch’s contractual right to stop borrowing money does not constitute
“property” or “rights to property.” Having resolved the government’s assertions against
Lerch in Lerch’s favor, there is no need to address the assertions against SunWest.
Conclusion
For the foregoing reasons, the government’s petition for a rule to show cause is
denied.
ENTER:
_________________________________
Young B. Kim
United States Magistrate Judge
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